Jersey Financial Services Commission Seminar
Keynote speech: Banking
By David Carse OBE
Director General, Jersey Financial Services Commission
Public speech - 9 November 2004
Good Morning and Welcome to the first in a series of workshop seminars focussing on the various sectors of the industry. The seminars have been arranged directly as a result of requests from the industry at our February event. The delegates asked for presentations focussed on the specific issues relevant to each industry sector and we hope that these four days will do just that.
I am delighted that you are all here and that we have had such a good response.
The emphasis will be very much on practical issues and on providing feedback to you on the sort of problems that arise in our day-to-day interaction with regulated entities. We will also try to provide you with solutions to go along with the problems. I hope very much that you will feel that the Commission is part of the solution rather than the problem. But if you have a contrary view, please let us know. This is very much intended to be an interactive event.
From my point of view, this is an opportune time for this seminar. I have now been over a year in office, and a lot has happened during that period. I hope that you will feel that we have made progress, certainly in terms of building up a constructive relationship with the industry.
In this short opening speech I will make some observations about the key issues and challenges that are facing the finance industry in Jersey, and about some of the topics that the later speakers will be addressing in relation to the banking sector.
Key issues facing the finance industry
It seems to me the Key Issues centre on how the Island will move forward in terms of maintaining and enhancing competitiveness, quality, its skills pool, and reputation.
On Competitiveness, what matters is price, position and product.
We know our price is dearer than some other jurisdictions, but not dearer than London, Geneva, Luxembourg or Dublin. We cannot in any case hope to compete on price – there will always be someone cheaper.
We know our position in its various manifestations (geographical, political, regulatory, legal) is better than Cayman, BVI, Bahamas, Bermuda, etc. Jersey came out well in the IMF review, and we are negotiating a good position in the European tax initiatives. Jersey was able to offer a safe haven to a number of institutions after the recent hurricanes in the Caribbean – a reminder that despite our moans about the weather here, Jersey is a relative haven of stability in all its various forms.
Our product is good - very good - but we need to make sure it is excellent. We must maintain a competitive legislative programme, and a legal and regulatory framework that give business a solid platform from which to market their services. Initiatives such as protected cell companies and foundations are an example of this. But if new products such as foundations are introduced, they will need to be firmly rooted in the Jersey legal and regulatory ethos. The way forward is not through regulatory arbitrage, or a “race to the bottom”, but through the pursuit of excellence by all the players in the industry, including the Commission.
That is where quality, skills pool and reputation come in and indeed are vital.
Quality is always a difficult thing to define; yet we all know it when we see it. It’s not about slick advertising or snappily dressed executives. Its something more solid, more sustained, more lasting.
From a regulatory point of view – and perhaps in this context from a client point of view – quality could be described as an industry made up of firms that are financially sound, operate with integrity and competence, that take their duty of care and responsibilities to their clients seriously, that have sound organisation and structure, that are open and transparent in their business arrangements, and are well managed.
Certainly, those are the criteria that we look for in exercising our supervisory oversight and when we find them – which we often do – we are extremely pleased, not least because it gives us less work to do. But equally, it would be wrong not to acknowledge that the culture of excellence is not evenly spread throughout the industry, and some of our regulated entities give us more headaches than others. Our role as we move forward is to assist in the process of raising standards throughout the industry, and I hope that this series of seminars will have a part to play in this.
As regards the skills pool, the old differences between on shore and off shore are being eroded. Over the last 10 years the basic proposition has changed dramatically. The old ways were that offshore equated to secrecy and tax haven – in the modern world neither of those concepts can form the core of a respectable jurisdiction’s offering. So what is the differentiation?
Tax neutrality does help and our position in the various forms that I have described is another big plus. But these by themselves are not enough to create the “u.s.p.” that makes a financial centre truly successful.
What really matters is the skill of our bankers, our trustees, our asset managers, our fund managers and administrators, our custodians and all the other finance industry professionals. And their skills sets sit within an overall framework of the skills of other professionals that make up the industry – the lawyers, accountants, tax specialists and so on, as well as the regulators, law enforcers, and judiciary. Jersey is a place where clients get timely access to impartial justice – not a concept honoured in all parts of the world.
To retain this advantage it is important that each business invests in its staff, and searches for the best people, if necessary bringing them into the island to help train and develop local talent.
It is the conduct of all of the industry that makes up its reputation. The industry’s – indeed the Island’s reputation – is only protected to the extent of its weakest link.
I hope, in this context, that regulatory standards assist the industry by identifying weak players and encouraging them to “shape up or ship out”. Our duty to the quality institutions is to protect their hard earned reputation from the conduct of the weakest.
In this we need your support. The Commission must listen to the needs and concerns of the industry, but we also need to be listened to.
Inside the Commission itself, we are committed to travelling our own road to excellence and we are currently reviewing our internal efficiency. We have recently changed our structure to make it more industry focussed and we are looking for opportunities to streamline our regulatory regime in a way that maintains standards but reduces administrative burden – for example, by merging laws and orders so that a firm operating under more than one licence, has only one regime to follow. This will reduce your costs but keep the joint regulator and industry commitment to quality.
Part of the Commission’s restructure has involved the appointment of Mark Sumner as our Director of Banking. Mark will be speaking to you later this morning. He brings to the Commission long experience in banking, and his appointment is a practical demonstration of our desire to get close to the industry and understand its needs.
Key challenges for the banking sector
Turning to the Key Challenges, it might be thought at first sight that banks are facing somewhat less formidable challenges than other parts of the industry. Banks are generally large organisations or part of large groups; they have been around for a long time; and they are used to being regulated. The banks in Jersey fall into this category.
But size brings with it complexity and difficulties of control, and banks are certainly not immune from slipping on the occasional banana skin. The difference however is that when slippage from high standards does occur, banks will normally recognise the problem and do something to put it right. That has certainly been our experience with the banks in Jersey.
We have however to face the fact that the number of banks here is getting fewer. I do not think that this reflects a decline in the attractiveness of Jersey as a financial centre – indeed the amount of bank deposits keeps going up. Rather it is the result of the competitive pressures in the industry that is driving consolidation and leading banks to think more carefully about the scale and spread of their international networks. Increasingly, outposts in jurisdictions like Jersey have to justify their existence to head office, which brings us back to the pursuit of excellence that I mentioned earlier.
One consequence of the falling number of licences is a decline in the fee income that the Commission receives from banking licences. This is why we had to come to the banks earlier this year with a proposal to increase the licence fees ahead of the normal schedule. Although I would not expect any bank to be over-enjoyed at the prospect of paying more to be regulated, it is a tribute to the banking sector here that it responded in a positive way and we were able to come up with a mutually acceptable solution, including a change to the Banking Law in record time to enable a sliding scale of fees to be introduced.
We are just in the process of putting together our business plan for next year and you will hear more about what we have in mind from the other speakers. Let me just say that clearly one of our joint challenges will be to progress the implementation of the New Capital Accord in the most cost-effective way possible. We have already had constructive discussions with the industry on this during this year and we will continue this process in 2005.
Also on the horizon are the new Codes of Practice and the merger of the Banking Law into the Financial Services Jersey Law – part of the process of keeping the legal framework up to date and more user-friendly.
One item in our plan that is likely to cause mixed emotions is the proposal for a depositor compensation scheme. This was one of the Edwards recommendations and one of the few that remains to be implemented. We have devoted little attention to taking this forward in 2004, because our focus was on other things, notably the new AML Handbook, which you will be hearing about later this afternoon.
But we have taken the opportunity to consider with our Board of Commissioners during the year whether we want to continue with the scheme, and we have reached the conclusion that we do. The Top 500 policy for the admission of banks – which incidentally we are sticking with – and our ongoing supervision of banks, make it unlikely that a failure would occur in Jersey – but not impossible. And we think that we need to have a contingency mechanism in place to compensate depositors in case the worst happens. After all, you do not expect your house to burn down, but you still take out insurance.
We shall therefore be progressing this issue in 2005, but, again, we shall try to ensure that what we put in place is as cost-effective as possible.
One thing that it does not look like we will be progressing in 2005 is the Financial Ombudsman Scheme. There are legitimate concerns about the cost of such a scheme, and it is fair to say that the States has yet to be convinced that an ombudsman scheme is needed. The volume of complaints that the Commission receives suggests otherwise, and you will be hearing about our experience of handling these later on.
But if a statutory scheme is not in the offing, the question is whether there is a viable alternative. This is something that I would throw back to the industry as a further challenge. Can you help us to come up with a solution – perhaps in the form of an industry arbitration panel? I would welcome the chance to discuss this with Jersey Finance and the other associations, and you might take the opportunity to debate it today.
I know we have a full day ahead and so I will stop at this point. There will be an opportunity in the interactive sessions to conduct a free and frank exchange of views. I mentioned earlier that I hope that the Commission will be listened to. Equally, we are committed to listening to you – your concerns, your questions, your aspirations for your industry. Please make the most of the opportunity today to make it a real exchange: we have much to learn and are keen to increase our understanding of this vital part of the Jersey economy.
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